In this post, our goal is to help you reduce your DSO.
Cash flow is king when it comes to business. Historically, companies with ample cash reserves weathered the markets better than those who had poor cash management. Your company’s revenue figures are great, but they don’t ultimately mean much if your cash flow is poor.
It doesn’t matter how much receivables you have due if you don’t have enough funds in the house to keep the business running.
During the pandemic, many businesses found themselves scrambling to manage staff, maintain supplies and reconfigure their organizations in response to the reduced cash flow.
So if your cash flow is bad, it’s time to improve that. If it’s taking your company too long to collect on invoices, you need a way to speed up the time between when services are provided and payment is received. Introducing the importance of reducing DSO.
What Does DSO Stand For?
If you are wondering what DSO stands for, it stands for Days Sales Outstanding. In layman’s terms that means the amount of time it takes after you send an invoice before you get paid. The sooner you receive payment, the sooner you get access to the cash flow as a resource in your organization.
How To Calculate Days Sales Outstanding (DSO)
The formula to calculate Days Sales Outstanding is below.
- DSO = Accounts Receivables / Net Credit Sales X Number of Days
What Is A Good DSO Ratio?
So how do you know what a good DSO ratio is versus a bad one? According to an APQC survey from CFO magazine, the most efficient companies report a DSO of 30 days or less. But that number can vary greatly from industry to industry. In service-based organizations, credit terms allow customers to pay 30, 60, or even 90 days after services have been rendered. In fact, the DSO can be even longer in some trade industries.
According to Intellichief, here are some average DSO numbers by industry:
- Management consulting (125.07 days)
- Oil and gas extraction (110.86 days)
- Technical and trade schools (109.32 days)
- Automotive equipment rental and leasing (104.35 days)
- Outpatient care centers (98.99 days)
- Mining support (90.76 days)
- Architectural and engineering services (74.36 days)
So if your DSO is less than 30, congrats, you are doing a great job at collecting payments in a quick time frame. But, if your DSO is more than 30, it’s time to ask yourself what you can do to improve this number for your business.
Why Is DSO So Important To Management?
The overall goal is to have improved cash flow and in order to accomplish this, an organization must stay on top of unpaid invoices. So the longer a business has towait for payment on an invoice, the higher the risk of a payment default.
Reviewing DSO helps management monitor:
- Invoice management efficiency.
- The profitability of the business.
- Economy and marketing conditions for their customers.
- Communications with past-due customers.
- Bad debt risk from customers who may default on payment.
- Credit issues with customers with a negative credit standing.
- An ineffective collection process in AR.
A good DSO indicates to managers, investors, and creditors that your company is effective in collecting cash from customers. It’s a sign of strength and stability.
If your DSO is high, it’s a red flag that you need to take measures to improve your invoicing and collection time to boost profitability.
How To Reduce Days Sales Outstanding?
Looking for ways to lower your Days Sales Outstanding? It’s all about finding ways to convert your company’s accounts receivables into cash. So if it’s taking you too long to collect that cash that is due for payment, there are measures you can take to improve DSO.
- Find out what a good DSO is for your particular industry.
- What gets measured gets managed.
- Keep credit in mind.
- Set shorter payment terms.
- Offer a discount for early payment.
- Keep an eye on payment terms.
- Actively manage Accounts Receivable.
- Faster billing means faster payments so try to automate that process.
- Automatically process payments.
Ready To Improve Cash Flow Through Reducing DSO? Book A Demo!
Finding a business solutions system that meets your needs can be challenging, but the right professional can help you create a system that meets your AR goals and takes the guesswork out of the process.
We can accelerate your cash flow with AR automation solutions. For over 40 years, Ash Conversions has been helping companies like yours to reduce DSO and get cash in faster. We can help your company implement and streamline your accounts receivable practices. Our system helps you cut AR processing costs and reduce DSO with ACI’s AR Assistant Workflow Automation. Book a Demo to find out more today!
